End of a fancy business relationship.
By Rajiv Theodore
NEW DELHI: Like any high-profile relationship, the break–up was in the air just after the marriage in 2007. The much-hyped equal joint venture was mired in turmoil ever since India’s Bharti Retail and US giant Walmart came together to do business in India. On Wednesday, the two partners called it quits, finally. The break up was expected, especially after recent statements by Bharti chairman Sunil Bharti Mittal and Walmart Asia CEO Scott Price, that the two partners were evaluating the joint venture.
Post the split, both companies have said that they would independently pursue retail business in India. Walmart will get 100 percent ownership of the ‘Best Price’ Modern wholesale cash and carry business while Bharti Retail will continue to operate ‘Easyday’ retail stores.
Walmart has been already handling the Best Price Modern Wholesale Stores in India. It had opened its first wholesale cash-and-carry store under the brand “Best Price Modern Wholesale” in Amritsar in May 2009. The US firm has also been managing Bharti’s retail chain Easy Day. Bharti will now acquire compulsory convertible debentures held by Walmart in Cedar Support Services, a company owned and controlled by Bharti. However, this new arrangement is subject to receipt of the requisite regulatory approvals.
Industry watchers say what hastened the split were the clauses in India’s policy towards multi-brand retail announced in September 2012 which seeks a mandatory 30 percent sourcing from Indian small and medium enterprises (SMEs) and a minimum $100 million investment into fresh facilities of which 50 percent would be in the backend.
After India announced its rules regarding foreign investment in supermarkets, Wal-Mart also sought clarity on aspects of the policy, specially the sourcing clause. In July, it expressed an inability to meet the norm requiring it to source 30% of the goods it sold from small industries, saying it could source only about 20%. In August, Price met top officials of the department of industrial policy and promotion (DIPP) under the Commerce Ministry and sought clarity on the recent changes the government had made in the multi-brand retail FDI policy.
The DIPP later Wednesday maintained that it would not budge from its position. FDI policy cannot be company specific. ‘’We have put in place an enabling regime for multi-brand retail sector. We have no plans to relax the 30 per cent local sourcing norms, Secretary in the Department of Industrial Policy and Promotion (DIPP) Saurabh Chandra said in a statement after the breakup of the two retail companies.
At the moment, however, Walmart plans to continue to grow its business while working with the government and interested stakeholders to create conditions that enable foreign direct investment in multi-brand retail.
Scott Price in a statement Wednesday said that operating independently would be beneficial to both companies. “We will continue to make important social and environment contributions to India, seeking conditions that will boost retail FDI in India,” he said. “Through Walmart’s investment in India, including our cash and carry business, supply chain infrastructure, direct farm program and supplier development, we want to serve India and its people, and continue to make important social and environmental contributions to the country.”
On the Indian side, Rajan Bharti Mittal, Vice-Chairman and MD, Bharti Enterprises said, “Bharti is committed to building a world-class retail venture and will continue to invest in Bharti Retail across all formats. We believe that with our current footprint of 212 stores, we have a strong platform to significantly grow the business and delight customers. We wish Walmart the very best for the future.”
Another point of contention was that Walmart’s investment in Bharti had come under the scanner amid allegations that the global retail chain may have entered India’s front-end multi-brand retail business two-and-a-half years before the government actually lifted the ban on foreign investors in the sector last year.
In November 2012, Bharti Walmart suspended its chief financial officer and other employees as it investigated alleged violations of US anti-bribery laws. A few months ago, Walmart’s India head, Raj Jain, was replaced by Ramnik Narsey as interim chief. At Bharti Retail also, Chief Operating Officer Mitch Slape, an old Walmart hand, was sent back to Walmart US recently.
Walmart had invested $100 million in Cedar, the parent company of Bharti Retail, in March 2010 in the form of compulsory convertible debentures. The debentures were sold, and indirect control and management ceded to Wal-Mart by the Indian company at a time when FDI wasn’t allowed in multi-brand retail, but this investment is being probed by the Enforcement Directorate for alleged FEMA (Foreign Exchange Management Act) violations. This particular circuitous move has prompted many to label the transaction as ‘’clandestine and illegal’’ direct investment in a retail company
This also meant that Walmart wanted to distance itself from any controversy in India as it fears the US Foreign Corruption Practice Act (FCPA) may come down hard on it. And even though Walmart promises to stay invested in India, it had put expansion plans on hold since mid-2012. Walmart debuted in India with its first wholesale store in 2009 but has not added a single cash-carry outlet since October 2012.
Ever since September 2012 when the Indian government had permitted foreign retailers to own 51 percent of their Indian operations ambiguity around rules governing the policy prevailed which led to a situation where no foreign retailer has so far applied to enter the country yet. Some analysts felt the delay was because they are waiting for the 2014 elections to happen to take a call.